Staring in the face of a strong euro, growth-sapping deflation, feeble growth and stubbornly high employment, the ECB president had to contend with claims he was operating with a “peashooter.” But up stepped the Italian with a back-to-basics approach, wrong-footing global markets with his new breed of “credit-easing” tactics amid a flurry of aggressive monetary policy.
Akin to the sort of “helicopter money” some were expecting, his new targeted long-term refinancing operations, or TLTRO II, are effectively giving free money to the banks to lend to the real economy.
Frederik Ducrozet, a Eurozone economist with private Swiss bank Pictet, expects it to lower bank funding costs, mitigate the adverse consequences of negative rates, strengthen the ECB’s forward guidance and improve the transmission of monetary policy.
“Critics are missing the point,” he said in a note at the end of March.
Draghi and his lieutenants have upped their game from the first round of TLTRO which finished just a few weeks ago. Now this series of four loans – conducted between June 2016 and March 2017 – will have a fixed maturity of four years. The interest rate will start at nothing, but could drop as low as the deposit rate, which is currently -0.40 per cent, if they meet their loan targets.
Yes, that does mean the banks will be receiving cash for borrowing from the central bank.
Banks will need to post collateral at the ECB but there’s no penalty if they fail to meet their loan targets. All that will happen is that the loans will be priced at zero for four years.
“This is unconditional liquidity to banks at 0 per cent cost, against collateral,” according to Ducrozet.
We’ll wait and see what this does for the money supply in the Eurozone but there are signs that this is already improving. Recent data showed lending to Eurozone companies and households grew at its fastest pace since late 2011 in February, according to Reuters. Bank loans to non-financial corporations saw their best growth rate since December 2011 and household lending growth was at its fastest since November 2011.
We’re a long way off from the near 2 per cent inflation target, but it’s encouraging that Draghi might finally be ignoring the strength of the euro and concentrating on the nitty-gritty in the real economy.
Abhishek Singhania, a strategist at Deutsche Bank, sums it up by saying the new LTROs “reduce the stigma” attached to their use relative to the previous version. “Banks are encouraged to extend credit to the real economy but are not penalised for not meeting their benchmark lending targets,” he said in a note last month.